September 2018 PGWA Newsletter

Game Plans and Success

College and professional football kicked off recently. Many fans will be watching the action and rooting on the favorite team’s offense and their prime playmakers. For others the real playmakers are on the defensive side of the football.

There’s a saying attributed to College Football Hall of Fame coach Paul “Bear” Bryant that “Defense Wins Championships”. If your favorite team has a high-scoring offense it may be for nothing if the defense can’t protect the lead. Just ask the New England Patriot fans about how their defense did against the Philadelphia Eagles at this year’s Super Bowl. Maybe it’s the Chicago Bears turn this year, right (they’ll have to rebound from that poor 2nd half showing against the Packers)?

Achieving financial success is a combination of a diversified portfolio allocation along with preserving capital to avoid large downswings in the market. The following is a brief discussion of how to strategize as you make your way to the financial goal line.

The financial markets have had quite a run since the last downturn. There is growing concern whether this market can keep on its current upward trend. Inflation, debt levels and trade fights are in the news along with the 10-year anniversary of the ’08 financial crisis. This leads investors to make emotionally-driven choices on their portfolio which can lead to poor long-term outcomes.

It makes sense to evaluate your objectives and take an example from football coaches. Create a Game Plan.

Step #1: Have a Game Plan

Investors with an aggressive game plan are seeking growth and their portfolios include higher risk assets, which can include growth stocks, small cap stocks, emerging market stocks, and high yield bonds. Aggressive game plans can help investors take an early lead, but it’s important to remember the words of Texas Coach Darrell Royal: “There are three things that can happen when you pass, and two of them are bad.”

Alternatively, a coach with a conservative game plan might feature a high number of running plays, moving the ball steadily up the field. Investors following this game plan have objectives that can include income or capital preservation, with a small amount of growth. This plan places far more emphasis on defensive strategies. The assets used include investment grade and municipal bonds, defensive equities with high dividends and low volatility, and depending on how conservative, higher cash positions.

Step #2: Know Your Strengths

Investors need to understand if they have the right assets in their portfolio, on both sides of the ball, to maximize their chances of overcoming uncertainty and achieving the outcome they seek. Whether it’s growth, income, capital preservation, or a combination of strategies the plan should fit the investor’s risk profile.

A diversified allocation that includes a mix of equities and fixed income can improve your chances of overcoming uncertainty. The rising interest rate environment leads me to caution many investors about taking on long-dated bond maturities. Buy and hold may work in certain markets, but while it’s good to have a long-term perspective I recommend tactical strategies be put in place, as well.

Step #3: Don’t Overlook Special Teams

As a metaphor to an investment strategy, special team players are tactical assets used to take advantage of distinct financial niche opportunities which can enhance or protect portfolios during times of volatility.

Step #4: Teamwork and Interaction Are Vital for Success

When it comes to investing, the same holds true: well-constructed portfolios are diversified across assets that work together to elevate the certainty of success.

Consider how this might work on the defense. The front linemen of a defense need to pressure the running backs and quarterback at the line, so that the defenders behind them are able to focus on the receivers. If one part of the defense breaks down other players have to react. The reactions may not happen fast enough to prevent the offense from scoring.

Step #5: Support Your Defense

Game strategies that stress their offense run the risk of a damaging loss.

Winning teams are strong on both sides of the ball. Investors all too often focus only on offense and do not have well diversified portfolios that include a strong defense. They’re running a very aggressive offense; however, some may be weak on defense. This creates a significant weakness in their game plan that uncertainty can exploit.

Defeating uncertainty means not only defending the lead when you have it, but also avoiding a devastating loss in the form of a deep and damaging drawdown.

In investment terms, the players are uncorrelated components of a portfolio. Each component needs to fill their role while working together. If the interaction breaks down the results will be less than optimal.

Provider Group Wealth Advisors

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